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goodeeds writes (in part):

Your post wasn't entirely clear to me, but this sentence above certainly doesn't make sense. If your friend's employees owe taxes on stock profits, then they certainly did have the money at some point in time. You didn't say if this was exercising options or shares of stock, but it takes a transaction that yields a profit to owe a tax; tax is not paid on a 'value' of a stock.

I reply:

That's not entirely accurate. When discounted stock options are used as compensation, the "bargain element" is usually taxed, either as ordinary income (in the case of non-qualified options) or under AMT rules (for ISO options). In either case, it's the paper profit that's used to calculate income. That profit is also added to the stock's basis (or its AMT basis, in the case of ISO options), but realizing a loss in 2001 by selling the fallen shares won't reduce tax liability for 2000. The only way to avoid this trap is to realize the loss in 2000. --Bob
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